Capital

Just as we need new sources of growth to expand opportunities in our economy, South Australia needs new sources of capital to fuel the enterprise that drives growth.

The challenge of raising capital to grow enterprise is being actively explored around the world. The point is that different forms of capital are right for different circumstances. What follows is not a definitive essay on finance models, or capital raising vehicles, but a range of funding platforms and their potential as new sources of capital for Adelaide’s future.

Innovative funding models are conventionally found in unconventional sectors; emerging markets are often developed by those who have found access to traditional finance difficult.

Social Finance

‘Social finance’ is a growing source of funding suited to small scale social enterprises, and social programs that would otherwise compete for public funding and grants.

The most popular and visible form of social financing is known as ‘crowd funding’.

Crowd funding is relatively new form of finance secured by raising small amounts of money from a large number of people, generally via the internet. Through engaging websites using video to explain a concept or prototype, an entrepreneur attracts ‘pledges’ from anyone, anywhere. Typically, funding is secured on the basis of a small token or reward in return for a scale of donations, ranging from anything from $10 to $2,000.

Crowdfunding models can be equity-based or lending-based and are particularly effective for digital goods such as software, film and music. Donation-based and reward-based crowdfunding are suited to ‘caused-based campaigns’ that appeal to donor personal beliefs and passions.

Almost US$1.5bn was raised using crowdfunding in 2011, with more than 1 million successful campaigns demonstrating this platform has been rapidly maintstreamed by users around the world.

Adelaide has the highest giving rate in Australia, with 90% of adults involved in giving.

Social finance capital is well suited to Adelaide’s start-up and micro enterprises. Local Adelaide-based entrepreneurs are already utilising Kickstarter and Pozible to raise capital for projects including;

The Mill – a case study

The Mill is a self-funded artist run initiative operating in Angas St, Adelaide. Established in 2013,

The Mill offers artists studio spaces, creative industry offices and facilitates an incubation environment providing development opportunities. The Mill is a space for artists to connect and collaborate with other artists and wider industries.

Beyond offering space, The Mill provides artists and arts organisations with much needed administration, networking, and artistic support; facilitating artistic residencies and creative programs through The Raw Mill. The Mill also forges connections between other arts spaces in Adelaide, providing administration support for these spaces and facilitating use of spaces across Adelaide.

In July 2013, The Mill raised funds through Pozible to complete the fitout of their Angas St hub. 154 supporters pledged $9,421 – exceeding the target of $8,000

Experience shows that crowd funding can help convert an idea in to product. Projects already funded through crowd funding sites like Kickstarter and Pozible include;

Pebble E Paper Smartwatch.

Goal: $100,000 Raised: $10,266,845

The Pebble smartwatch is currently the most funded project on Kickstarter. The Pebble is paired to your smartphone via Bluetooth, allowing you to receive text messages and phone call notifications. The world’s first widely successful smartwatch, Pebble recently announced that Best Buy will now sell the smartwatch in its stores for $150.

The Form 1 3D Printer.

Goal: $100,000. Raised: $2,945,885

The Form 1 is one of the first ‘affordable’ high-resolution 3D printers. For labs, schools, and designers, the Form 1 offers a stereolithography machine capable of crafting detailed work.

Social finance from our social capital

Crowdfunding has grown organically and is not yet on the radar of governments or financial institutions as a serious source of capital. Adelaide’s strong social capital, with close social ties and active social media networks are an ideal scaffold from which to build a set of reforms around this emerging vehicle that could support act as a powerful differentiator from other cities and states. We are yet to understand how these new technologies may mature and what place there is for regulation, support or incentives to grow this socially-oriented form of capital raising.

Research suggests there may be a place for governments in supporting crowd funding platforms, including as promoter, curator, facilitator and as a host of its own platform. Experiences from around the world prove this growing area of financing deserves more work to better understand powerful social mega trends at play.

Social Impact Bonds

Social impact bonds are a means of securing capital for not-for-profit organizations that are delivering programs that seek to create impact in social problems such as juvenile justice, disability, homelessness or mental health.

Not for profit organizations include sporting clubs, faith-based groups, day care centres, family counselling agencies, housing and support organisations and many more.

This funding platform is relevant to South Australia as a means of providing alternative capital for social programs that may currently sit wholly within government departments, or be delivered via contracts with not for profits but lack explicit performance outcomes.

“A SIB restructures the relationships between government agencies, not-for-profit service delivery organizations and social investors such as charitable foundations and high net worth individuals. Under a SIB, a bond-issuing organisation raises capital from investors based on a contract with government to deliver improved social outcomes that generate future government cost savings. These savings are used to pay investors a reward in addition to the repayment of the principal, if the agreed outcomes are achieved.”

SIB’s are also occasionally called ‘pay-for-success’ financing where not-for-profit organizations are funded to provide early intervention, prevention or strategies that break the cycle of dependence. This model requires the achieving of successful outcomes prior to payment being made from the investor to the service provider. Failure to achieve the agreed performance may result in no payment. For this reason, evidence-based evaluation of success is essential.

Alternative models balance the risk between government, not-for-profit and investor, ensuring the service provider is funded for a basic level of performance while ‘reward payments’ are subject to a successful outcome. Because of this unique performance-based, measurable framework, a wider set of investors may be attracted, including;

philanthropic foundations, including family business and corporate foundations

high nett worth individuals

private funds

self managed superannuation funds

large institutional superannuation funds

commercial financial institutions

An online search for not-for-profit organizations operating in Adelaide indicates that more than 300 are active in fields such as sport, church and faith-based services, mental health, housing and employment support. Boosting our support for social enterprise such as this could attract large, well managed organizations within the sector to establish in Adelaide. Combining a program of attraction with large scale trials of social impact investment could alleviate the full cost of social programs on public sector balance sheets, and foster more community-based programs where impact can be greatest.

A comprehensive scoping report prepared for the NSW Government by the Centre for Social Impact on the value of a Social Impact Bond Pilot provides a well researched framework that should be further explored in Adelaide.

An Adelaide trial of Social Impact Bonds could better link funding of social programs in Adelaide and its regions, to improved performance for better service delivery outside of traditional departmental models. In this way, alternative financing may also drive a shift to a more effective, ‘light touch’ model of government that promotes a stronger role for not-for-profits with a ‘pay for success’ funding framework.

In short, Social Impact Bonds may be a financial instrument that gives us more for less.

We need institutional investment

We must attract institutional investment for the range of large scale economic infrastructure that is needed to meet the demands of a growing and developing city like Adelaide.

The total value of Australia’s superannuation funds is estimated to be more than $1.2 trillion, and there is significant interest in finding ways to leverage these funds as finance for physical infrastructure we need, including housing, rail, ports, roads and neighbourhood scale facilities.

Australia’s infrastructure needs are vast. In 2008, Citigroup estimated that more than $770bn was needed to fund the infrastructure we need, and that around $360bn of private sector finance was necessary. Examples of large scale infrastructure funded in partnership with Superannuation funds include the Port of Brisbane, the Victorian Desalination Plant and Peninsula Link road project.

Attracting prviate finance through institutional investment such as this could significantly boost the provision of much needed infrastructure in our regions, our cities and neighbourhoods. But to take advantage of this source of finance, Adelaide should lead in removing the common barriers including;

Failure to put in place long term plans for infrastructure

Lack of transparency about project pipeline and investment opportunities

High bidding costs involved in the procurement process of infrastructure projects

A model: convertible bonds for housing

Australia’s largest industry superannuation fund, AustralianSuper has confirmed support for bond-style financing for infrastructure such as not-for-profit social housing so long as a suite was tailored to institutional, retail and public investors.

Institutional funds value long term, steady investments like housing. Australia’s Housing and Urban Research Institute (AHURI) has identified a possible vehicle to expand financing in the housing sector modelled on the Austrian Housing Convertible Construction Bond. Coupled with this bond offer, a dedicated finance intermediary has been established with specialised expertise in housing provision, provider business models and public infrastructure required to support communities.

The 30 Year Plan for Greater Adelaide projects the need for 258,000 additional homes to accomodate 560,000 new people with economic growth of $127.7 billion and the creation of 282,000 additional jobs. Along with good planning, clever design and quality construction, alternative models of financing will be needed.

Procurement and finance – the double act

Attracting private finance for public infrastructure requires alternative procurement models to those we have relied on to deliver infrastructure from public funds in the past.

Adelaide is not currently keeping pace with other cities in utilising smart and balanced public private partnerships, private finance initiatives and other innovative forms of delivery.

South Australia must convince the private finance market that we are a safe pair of hands. We can do this if we show a long term pipeline of infrastructure projects linked to industry development and smart urban growth, and act smarter in how we manage infrastructure bid costs to reduce the costs of tendering to multiple consortia.

So what do we do?

We need investment. Our investment settings must be of a world standard – better than the rest, making us more attractive than elsewhere. Right now this is not the case. Our naturally conservative economy constrains growth rates and returns. We need to look at the investment regimes in place across the country and in our part of the globe to see what we can do to become one of the most attractive investment centres in the region.

1. Help establish an investment vehicle to work closely with Treasury, government infrastructure planning authorities, professional services firms and private investors to attract capital investment for state strategic infrastructure. This institution must be empowered to broker investment deals.

The role of this vehicle would be to;

a Broker capital raising from a range of investor types, including institutions, global and local superannuation funds and charitable and philanthropic sources

b. Devise innovative finance and procurement models to enable prudent expansion of our infrastructure pipeline in Adelaide and the regions.

c. Identify packages of assets that the State may wish to use to facilitate a ‘recycling’ of capital. This opportunity should extend to packages of public and privately owned assets.

d. Exploit the potential of emerging financing models such as crowd sourced funding and social impact investing.

e Act as the ‘boundary rider’ to source and extend emerging thinking on the ‘shared economy’ to ensure South Australia is recognised again as a serious player in finance, infrastructure and social investment.

f. Facilitate mentorship to start ups and emerging enterprises to remove perceived and actual barriers to access to finance.

2. Facilitate a productivity-focused group be commissioned to recommend new business models to operate across South Australia on the delivery of infrastructure and services to the community. This should capture private and public sector participation in sectors such as health, education, transport, defence, manufacturing, essential services, etc. The objective will be to identify innovative new markets that can be created or enhanced to facilitate better outcomes for South Australians as both service consumers and investors.